toca-10q_20170930.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2017

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from               to             

Commission File Number: 001-38052

 

TOCAGEN INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

26 - 1243872

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)

 

 

3030 Bunker Hill Street, Suite 230, San Diego, CA

92109

(Address of principal executive offices)

(Zip Code)

 

Registrant's telephone number, including area code: (858) 412-8400

 

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.        Yes           No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).           Yes           No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and ‘‘emerging growth company’’ in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated filer

Non-accelerated filer

  (Do not check if a smaller reporting company)

Smaller reporting company filer

Emerging growth company

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes     No  

As of November 6, 2017, the registrant had 19,809,449 shares of common stock, par value $0.001 per share, outstanding.

 

 

 

 

 


 

TOCAGEN INC.

TABLE OF CONTENTS

 

 

 

 

 

Page No.

PART I

 

FINANCIAL INFORMATION

 

3

ITEM 1.

 

FINANCIAL STATEMENTS

 

3

 

 

Condensed Balance Sheets as of September 30, 2017 (unaudited) and December 31, 2016

 

3

 

 

Condensed Statements of Operations and Comprehensive Loss for the Three and Nine Months Ended September 30, 2017 and 2016 (unaudited)

 

4

 

 

Condensed Statements of Cash Flows for the Nine Months Ended September 30, 2017 and 2016 (unaudited)

 

5

 

 

Notes to Condensed Financial Statements (unaudited)

 

6

ITEM 2.

 

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

19

ITEM 3.

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

26

ITEM 4.

 

CONTROLS AND PROCEDURES

 

26

PART II

 

OTHER INFORMATION

 

27

ITEM 1.

 

LEGAL PROCEEDINGS

 

27

ITEM 1A.

 

RISK FACTORS

 

27

ITEM 2.

 

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

58

ITEM 6.

 

EXHIBITS

 

59

SIGNATURES

 

 

 

2


 

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

TOCAGEN INC.

CONDENSED BALANCE SHEETS

(in thousands, except share and par value data)

 

 

 

September 30,

2017

 

 

December 31,

2016

 

 

 

(unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

74,842

 

 

$

5,510

 

Marketable securities

 

 

24,731

 

 

 

25,735

 

Prepaid expenses and other current assets

 

 

1,238

 

 

 

1,216

 

Total current assets

 

 

100,811

 

 

 

32,461

 

Property and equipment, net

 

 

1,045

 

 

 

743

 

Other assets

 

 

314

 

 

 

2,147

 

Total assets

 

$

102,170

 

 

$

35,351

 

LIABILITIES, CONVERTIBLE PREFERRED STOCK AND

STOCKHOLDERS’ EQUITY (DEFICIT)

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

1,154

 

 

$

1,666

 

Accrued liabilities

 

 

8,320

 

 

 

5,437

 

Notes payable, current portion

 

 

7,200

 

 

 

7,200

 

Deferred license revenue

 

 

41

 

 

 

45

 

Deferred grant funding

 

 

23

 

 

 

34

 

Total current liabilities

 

 

16,738

 

 

 

14,382

 

Notes payable, net of current portion

 

 

5,276

 

 

 

10,241

 

Convertible promissory notes payable (due to related parties of $0 and $1,025

   at September 30, 2017 and December 31, 2016, respectively)

 

 

 

 

 

3,398

 

Convertible promissory notes subscription liability

 

 

 

 

 

140

 

Long-term portion of deferred license revenue

 

 

41

 

 

 

68

 

Preferred stock warrant liabilities

 

 

 

 

 

126

 

Total liabilities

 

 

22,055

 

 

 

28,355

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Convertible preferred stock, $0.001 par value; 51,000,000 shares authorized

   at December 31, 2016; 46,163,605 shares issued and outstanding at December 31, 2016;

   aggregate liquidation preferences of $131,720 at December 31, 2016

 

 

 

 

 

131,413

 

Stockholders’ equity (deficit):

 

 

 

 

 

 

 

 

Preferred stock, $0.001 par value; 10,000,000 shares authorized at September 30, 2017;

   no shares issued or outstanding at September 30, 2017

 

 

 

 

 

 

Common stock, $0.001 par value; 200,000,000 and 77,800,000 shares authorized

   at September 30, 2017 and December 31, 2016, respectively; 19,809,449 and

   2,202,517 shares issued and outstanding at September 30, 2017 and

   December 31, 2016, respectively

 

 

20

 

 

 

2

 

Additional paid-in capital

 

 

236,190

 

 

 

3,581

 

Accumulated deficit

 

 

(156,092

)

 

 

(128,000

)

Accumulated other comprehensive loss

 

 

(3

)

 

 

 

Total stockholders’ equity (deficit)

 

 

80,115

 

 

 

(124,417

)

Total liabilities, convertible preferred stock and stockholders’ equity (deficit)

 

$

102,170

 

 

$

35,351

 

 

See accompanying notes.

 

 

3


 

TOCAGEN INC.

CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(in thousands, except share and per share data)

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

 

(unaudited)

 

 

(unaudited)

 

License revenue

 

$

10

 

 

$

11

 

 

$

31

 

 

$

38

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

7,563

 

 

 

7,586

 

 

 

20,819

 

 

 

20,585

 

General and administrative

 

 

2,184

 

 

 

956

 

 

 

6,154

 

 

 

3,170

 

Total operating expenses

 

 

9,747

 

 

 

8,542

 

 

 

26,973

 

 

 

23,755

 

Loss from operations

 

 

(9,737

)

 

 

(8,531

)

 

 

(26,942

)

 

 

(23,717

)

Other income (expense), net:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

214

 

 

 

53

 

 

 

354

 

 

 

170

 

Interest expense

 

 

(430

)

 

 

(511

)

 

 

(1,541

)

 

 

(1,519

)

Change in fair value of preferred stock warrants

 

 

 

 

 

(11

)

 

 

37

 

 

 

18

 

Total other income (expense), net

 

 

(216

)

 

 

(469

)

 

 

(1,150

)

 

 

(1,331

)

Net loss

 

 

(9,953

)

 

 

(9,000

)

 

 

(28,092

)

 

 

(25,048

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net unrealized gain (loss) on investments

 

 

4

 

 

 

 

 

 

(3

)

 

 

67

 

Comprehensive loss

 

$

(9,949

)

 

$

(9,000

)

 

$

(28,095

)

 

$

(24,981

)

Net loss per common share, basic and diluted

 

$

(0.50

)

 

$

(4.09

)

 

$

(2.19

)

 

$

(11.39

)

Weighted-average number of common shares outstanding,

   basic and diluted

 

 

19,809,449

 

 

 

2,200,509

 

 

 

12,847,206

 

 

 

2,199,114

 

 

See accompanying notes.

 

 

4


 

TOCAGEN INC.

CONDENSED STATEMENTS OF CASH FLOWS

(in thousands)

 

 

 

Nine Months Ended

September 30,

 

 

 

2017

 

 

2016

 

 

 

(unaudited)

 

OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

Net loss

 

$

(28,092

)

 

$

(25,048

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

3,076

 

 

 

920

 

Depreciation

 

 

196

 

 

 

190

 

Noncash interest expense

 

 

441

 

 

 

423

 

Change in fair value of preferred stock warrants

 

 

(37

)

 

 

(18

)

Amortization of premium (discount) on investments, net

 

 

(6

)

 

 

5

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Prepaid expenses and other current assets

 

 

(100

)

 

 

(376

)

Accounts payable

 

 

(500

)

 

 

864

 

Accrued liabilities

 

 

3,103

 

 

 

1,333

 

Deferred license revenue

 

 

(31

)

 

 

(38

)

Deferred grant funding

 

 

(11

)

 

 

(46

)

Net cash used in operating activities

 

 

(21,961

)

 

 

(21,791

)

INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

Proceeds from the sale/maturity of marketable securities

 

 

32,651

 

 

 

36,663

 

Purchases of marketable securities

 

 

(31,644

)

 

 

(18,419

)

Purchases of property and equipment

 

 

(337

)

 

 

(515

)

Proceeds from sale of property and equipment

 

 

20

 

 

 

 

Net cash provided by investing activities

 

 

690

 

 

 

17,729

 

FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

Proceeds from offering of common stock, net of issuance costs

 

 

88,618

 

 

 

 

Proceeds from issuance of convertible promissory notes, net of issuance costs

 

 

7,338

 

 

 

586

 

Principal payments on notes payable

 

 

(5,400

)

 

 

 

Proceeds from issuance of common stock

 

 

47

 

 

 

10

 

Cash paid for deferred debt and equity issuance costs

 

 

 

 

 

(596

)

Net cash provided by financing activities

 

 

90,603

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

 

69,332

 

 

 

(4,062

)

Cash and cash equivalents, beginning of period

 

 

5,510

 

 

 

8,150

 

Cash and cash equivalents, end of period

 

$

74,842

 

 

$

4,088

 

NONCASH ACTIVITIES

 

 

 

 

 

 

 

 

Convertible preferred stock converted into shares of common stock

 

$

131,410

 

 

$

 

Convertible promissory notes principal and accrued interest converted into

   shares of common stock

 

$

11,092

 

 

$

 

Preferred stock warrant liabilities converted into warrants to purchase

   shares of common stock

 

$

89

 

 

$

 

Deferred equity issuance costs paid in previous periods reclassified to equity

   on effective date of initial public offering

 

$

1,574

 

 

$

 

Deferred debt and equity issuance costs in accounts payable and

   accrued liabilities

 

$

96

 

 

$

247

 

Property and equipment purchases included in accounts payable and

   accrued liabilities

 

$

161

 

 

$

27

 

 

See accompanying notes.

 

 

5


 

TOCAGEN INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

1.

Organization and Basis of Presentation

Tocagen Inc. (Tocagen or the Company) is a clinical-stage, cancer-selective gene therapy company focused on developing first-in-class, broadly-applicable product candidates designed to activate a patient’s immune system against their own cancer from within. The Company’s cancer-selective gene therapy platform is built on retroviral replicating vectors which are designed to selectively deliver therapeutic genes into the DNA of cancer cells. Tocagen’s gene therapy approach is designed to fight cancer through immunotherapeutic mechanisms of action without the autoimmune toxicities commonly experienced with other immunotherapies.

From inception through September 30, 2017, the Company has devoted substantially all of its efforts to developing its gene therapy platform and its lead product candidate, Toca 511 & Toca FC, as well as raising capital and building its infrastructure. The Company has not generated revenues from its principal operations.

Initial Public Offering

On April 19, 2017, the Company completed its initial public offering (IPO), whereby the Company sold an aggregate of 9,775,000 shares of its common stock, at $10.00 per share, resulting in net proceeds of $86.9 million after underwriting discounts, commissions and offering costs of $10.8 million, of which $9.1 million of the costs were paid during the nine months ended September 30, 2017.

In addition, in connection with the IPO, all of the Company’s outstanding shares of convertible preferred stock were converted into an aggregate of 6,690,066 shares of the Company’s common stock, warrants to purchase up to 68,572 shares of the Company’s Series H convertible preferred stock were converted into warrants to purchase up to 9,936 shares of the Company’s common stock, each at an exercise price of $36.23 per share, and $11.1 million of aggregate principal and accrued interest underlying convertible promissory notes were automatically converted into an aggregate of 1,109,176 shares of the Company’s common stock at the IPO price of $10.00 per share.

Liquidity

The Company has a limited operating history and the sales and income potential of the Company’s business and patient markets are unproven. The Company has experienced net losses and negative cash flows from operating activities since its inception. As of September 30, 2017, the Company had an accumulated deficit of $156.1 million and working capital of $84.1 million available to fund future operations. As the Company continues to incur net losses, its transition to profitability is dependent upon the successful development, approval, and commercialization of its product candidates and achieving a level of revenues adequate to support the Company’s cost structure. The Company may never achieve profitability, and unless and until it does, the Company will continue to need to raise additional capital.

In performing the first step of the assessment under Accounting Standards Codification Topic 205-40, Presentation of Financial Statements - Going Concern, the Company concluded that, based on its cash resources available as of September 30, 2017, which include the $86.9 million in net proceeds obtained from its IPO, it will have sufficient resources to fund its business for at least the next 12 months from the date of this filing.

Use of Estimates

The Company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States (GAAP), which requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and expenses and related disclosures during the reporting period. Significant estimates in the Company’s financial statements relate to clinical trial accruals, the valuation of equity awards, and the development period used for license revenue recognition. Estimates are periodically reviewed in light of changes in circumstances, facts and experience. Actual results may differ from these estimates under different assumptions or conditions.

Interim Financial Reporting

The accompanying unaudited condensed financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and note disclosures normally included in annual audited financial statements prepared in accordance with GAAP have been omitted. The accompanying unaudited condensed financial statements include all known adjustments necessary for a fair presentation of the results of interim periods as required by GAAP. These

6


 

adjustments consist primarily of normal recurring accruals and estimates that impact the carrying value of assets and liabilities. Actual results may materially differ from these estimates. Operating results for the three and nine months ended September 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017. The accompanying unaudited condensed financial statements should be read in conjunction with the Company’s audited financial statements for the year ended December 31, 2016, which are included in the Company’s Registration Statement on Form S-1, as amended, originally filed with the SEC on March 9, 2017.

Segment Reporting

Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker, or decision making group, in making decisions on how to allocate resources and assess performance. The Company views its operations and manages its business in one operating segment. No product revenue has been generated since inception and all assets are held in the United States.

2.

Summary of Significant Accounting Policies  

Cash, Cash Equivalents and Marketable Securities

Cash consists of the balance in a readily available checking account. Cash equivalents consist of money market funds, certificates of deposit and U.S. Treasury securities with remaining maturities of three months or less at the time of purchase, and are considered highly liquid investments.

Marketable securities consist of certificates of deposit and U.S. Treasury securities that have original maturities greater than three months at the time of purchase. The Company classifies its investments as available-for-sale and records such assets at fair value in the balance sheet, with unrealized gains and losses, if any, reported in stockholders’ equity (deficit). Realized gains and losses are calculated on the specific identification method and recorded to interest income.

A decline in the market value of any marketable security below cost that is determined to be other-than-temporary results in a revaluation of its carrying amount to fair value and a new cost basis for the security. Impairment losses are recognized in other expense in the statement of operations.

Concentration of Credit Risk and Off-Balance Sheet Risk

Financial instruments that potentially subject the Company to significant concentration of credit risk consist primarily of cash equivalents and marketable securities. The Company’s investment policy includes guidelines for the quality of the related institutions and financial instruments, and defines allowable investments that the Company may invest in, which the Company believes minimizes the exposure to concentration of credit risk.

Deferred Equity Issuance Costs

Specific incremental costs directly attributable to a proposed or actual offering of securities are deferred and charged against the gross proceeds of the offering through additional paid-in capital.

Fair Value of Financial Instruments

The Company’s financial instruments consist principally of cash, cash equivalents, marketable securities, accounts payable, notes payable, convertible promissory notes payable and preferred stock warrant liabilities.

7


 

The authoritative accounting guidance defines fair value, establishes a consistent framework for measuring fair value and expands disclosure for each major asset and liability category measured at fair value on either a recurring or nonrecurring basis. Fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, the authoritative accounting guidance establishes a three-tier fair value hierarchy that prioritizes the inputs used in measuring fair value as follows:

 

Level 1:

Observable inputs such as quoted prices in active markets;

 

Level 2:

Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and

 

Level 3:

Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Clinical Trial Accruals

Expenses related to clinical studies are based on estimates of the services received and efforts expended pursuant to the Company’s contract arrangements. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. There may be instances in which payments made to the Company’s service providers will temporarily exceed the level of services provided and result in a prepayment of the clinical expense. Payments under some of these contracts depend on factors such as the successful enrollment of patients, site initiation and the completion of clinical milestones. The Company makes estimates of its accrued expenses as of each balance sheet date in its financial statements based on facts and circumstances known at that time. In accruing service fees, the Company estimates the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from its estimate, the Company adjusts the accrual or prepaid expense balance accordingly.

Revenue Recognition

Revenue is comprised of license revenue from the up-front payment that the Company received under its license and collaboration arrangement with Siemens Healthcare Diagnostics Inc. (Siemens).

Revenue is recognized for each unit of accounting when all of the following criteria are met:

 

Persuasive evidence of an arrangement exists

 

Delivery of the Company’s obligations under the arrangement has occurred

 

The seller’s price to the buyer is fixed or determinable

 

Collectability is reasonably assured

Amounts received prior to satisfying the revenue recognition criteria are recorded as deferred revenue in the Company’s balance sheets. Amounts expected to be recognized as revenue within the 12 months following the balance sheet date are classified as deferred revenue. Amounts not expected to be recognized as revenue within the 12 months following the balance sheet date are classified as long-term deferred revenue.

The Company analyzes multiple-element arrangements based on the relevant authoritative guidance. Pursuant to the guidance, the Company evaluates multiple-element arrangements to determine (1) the deliverables included in the arrangement and (2) whether the individual deliverables represent separate units of accounting, or whether they must be accounted for as a combined unit of accounting. This evaluation involves subjective determinations and requires the Company to make judgments about the individual deliverables and whether such deliverables are separable from the other aspects of the contractual relationship. Deliverables are considered separate units of accounting provided that: (i) the delivered item(s) has value to the customer (a collaboration partner to date) on a standalone basis and (ii) if the arrangement includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable and substantially in its control. In assessing whether an item has standalone value, the Company considers factors such as the research, manufacturing and commercialization capabilities of the collaboration partner and the availability of the associated expertise in the general marketplace. In addition, the Company considers whether the collaboration partner can use the other deliverable(s) for their intended purpose without the receipt of the remaining element(s), whether the value of the deliverable is dependent on the undelivered item(s) and whether there are other vendors that can provide the undelivered element(s).

8


 

Arrangement consideration that is fixed or determinable is allocated among the separate units of accounting using the relative selling price method. The Company determines the estimated selling price for units of accounting within each arrangement using vendor-specific objective evidence (VSOE) of selling price, if available, third-party evidence (TPE) of selling price if VSOE is not available, or best estimate of selling price (BESP) if neither VSOE nor TPE is available. The Company uses BESP to estimate the selling price, since it generally does not have VSOE or TPE of selling price for its units of accounting. Determining the BESP for a unit of accounting requires significant judgment. In developing the BESP for a unit of accounting, the Company considers applicable market conditions and relevant entity-specific factors, including factors that were contemplated in negotiating the agreement with the collaboration partner and estimated costs. The Company validates the BESP for units of accounting by evaluating whether changes in the key assumptions used to determine the BESP will have a significant effect on the allocation of arrangement consideration between multiple units of accounting.

The Company then applies the applicable revenue recognition criteria to each of the separate units of accounting in determining the appropriate period and pattern of recognition. If there is no discernible pattern of performance and/or objectively measurable performance measures do not exist, then the Company recognizes revenue under the arrangement on a straight-line basis over the period it expects to complete its performance obligations.

Research and Development Costs

Research and development expenses consist primarily of salaries and related expenses for personnel including stock-based compensation costs, preclinical costs, clinical trial costs, costs related to acquiring and manufacturing clinical trial materials, contract services, facilities costs, overhead costs, and depreciation. All research and development costs are expensed as incurred.

Debt Issuance Costs

Debt issuance costs incurred to obtain debt financing are deferred and are amortized over the term of the debt using the effective interest method. The costs are recorded as a reduction to the carrying value of the debt and the amortization expense is included in interest expense in the statement of operations.

Warrants for Shares of Preferred Stock

The Company accounts for warrants for shares of preferred stock with conversion features as liabilities in the accompanying balance sheets at their fair value on the date of issuance. The warrant liabilities are revalued at each balance sheet date until such instruments are exercised or expire, with changes in the fair value between reporting periods recorded as other income or expense in the statement of operations.  All preferred stock warrant liabilities were reclassified to equity in connection with the IPO.

Comprehensive Income (Loss)

All components of comprehensive income (loss) are reported in the financial statements in the period in which they are recognized. Other comprehensive income (loss) is defined as the change in equity during a period from transactions and other events and circumstances from non-owner sources, including unrealized gains and losses on investments. The Company’s only component of other comprehensive loss is unrealized gains (losses) on investments. Comprehensive gains (losses) have been reflected in the statements of operations and comprehensive loss for all periods presented.

Stock-Based Compensation

Stock-based compensation expense represents the cost of the grant date fair value of stock awards, including stock options, and stock purchase rights granted to employees. For awards with time-based vesting provisions, the Company estimates the fair value of stock options on the date of grant using the Black-Scholes option pricing model and recognizes the expense over the requisite service period of the awards, which is generally the vesting period, on a straight-line basis. For awards with performance-based vesting provisions, the Company estimates the fair value of stock option grants on the date of grant, or the date when all of the terms of the grant have been agreed to, if later, and recognizes the expense based on the probability of the occurrence of the individual milestones at each reporting period. The expense is recognized over the implicit service period that commences once management believes the performance criteria are probable of being met.  For purchase rights, the Company estimates the fair value of the purchase as of the plan enrollment date and recognizes expense on a straight-line basis over the applicable offering period.  The Company accounts for forfeitures when they occur, and reverses any compensation cost previously recognized for awards for which the requisite service has not been completed, in the period that the award is forfeited.

The Company accounts for stock options and stock warrants granted to non-employees using the fair value approach. These option and warrant grants are subject to periodic revaluation over their vesting terms.

9


 

Net Loss Per Share

Basic and diluted net loss per common share for the periods presented is computed by dividing net loss by the weighted-average number of common shares outstanding during the respective periods, without consideration of common stock equivalents as they are anti-dilutive. Common stock equivalents that could potentially dilute earnings in the future are comprised of shares issuable upon the conversion of all outstanding principal and accrued interest related to convertible promissory notes payable, shares issuable upon the conversion of convertible preferred stock, options to purchase shares of common stock outstanding under the Company’s equity incentive plan and warrants for the purchase of shares of common and preferred stock. For all periods presented, there is no difference in the number of shares used to calculate basic and diluted shares outstanding due to the Company’s net loss position.

Common stock equivalents from potentially dilutive securities, excluding shares issuable upon the conversion of all outstanding principal and accrued interest related to convertible promissory notes, that are not included in the calculation of diluted net loss per share, because to do so would be anti-dilutive, are as follows:

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Common stock options

 

 

2,636,060

 

 

 

906,599

 

 

 

2,636,060

 

 

 

906,599

 

Common stock warrants

 

 

10,660

 

 

 

724

 

 

 

10,660

 

 

 

724

 

Convertible preferred stock (as-converted)

 

 

 

 

 

6,690,066

 

 

 

 

 

 

6,690,066

 

Convertible preferred stock warrants

   (as-converted)

 

 

 

 

 

9,936

 

 

 

 

 

 

9,936

 

Total

 

 

2,646,720

 

 

 

7,607,325

 

 

 

2,646,720

 

 

 

7,607,325

 

 

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (FASB) issued new revenue recognition guidance which outlines a single comprehensive revenue model for entities to use in accounting for revenue arising from contracts with customers. The guidance supersedes most current revenue recognition guidance, including industry-specific guidance. The guidance provides that an entity recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance will be effective on January 1, 2018 and earlier application is permitted only for annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The guidance allows for either a full retrospective adoption, in which the standard is applied to all of the periods presented, or a modified retrospective adoption, in which the standard is applied to the most current period presented in the financial statements. As of September 30, 2017, revenue has been generated exclusively from the Company’s license and collaboration arrangement with Siemens. The Company is currently evaluating the potential impact that this guidance may have on its financial position and results of operations as it relates to this single arrangement, and expects to elect the modified retrospective adoption method.  No material changes are expected upon adoption.

In January 2016, the FASB issued new guidance that amends certain aspects of the recognition, measurement, presentation and disclosure of financial instruments. The amendments include the elimination of the available-for-sale classification of equity investments and requires equity investments with readily determinable fair values to be measured at fair value with changes in fair value recognized in net income (loss). The new guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2017, and requires a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. Early adoption is not permitted. The Company’s marketable securities are currently accounted for as available-for-sale financial instruments with changes in fair value recognized in other comprehensive income (loss). At the time of adoption, any amounts in accumulated other comprehensive income (loss) related to such financial instruments would be reclassified to non-operating income (expense) in the statement of operations. As of September 30, 2017, a net unrealized loss of $3,000 related to these investments was recorded in accumulated other comprehensive loss in the accompanying balance sheet.

In February 2016, the FASB issued new accounting guidance that amends the existing accounting standards for leases. Under the new guidance, lessees will be required to recognize for all leases, with the exception of short-term leases, a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Company is still in the process of evaluating the effect of adoption on its financial statements and expects to adopt the standard on January 1, 2019. The adoption will lead to an increase in the assets and liabilities recorded on the condensed balance sheets primarily due to the lease agreement attributable to leased lab and office space.

10


 

3.

Fair Value of Financial Instruments

Fair Values of Assets and Liabilities Measured on a Recurring Basis

The following tables summarize the Company’s assets and liabilities that require fair value measurements on a recurring basis and their respective input levels based on the fair value hierarchy (in thousands):

 

 

 

 

 

 

 

Fair Value Measurements at End of Period Using:

 

 

 

Total

 

 

Quoted Market

Prices for

Identical Assets

(Level 1)

 

 

Significant

Other

Observable

Inputs

(Level 2)

 

 

Significant

Unobservable

Inputs

(Level 3)

 

September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$

59,304

 

 

$

59,304

 

 

$

 

 

$

 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

$

20,931

 

 

$

 

 

$

20,931

 

 

$

 

U.S. Treasury securities

 

 

3,800

 

 

 

3,800

 

 

 

 

 

 

 

 

 

$

24,731

 

 

$

3,800

 

 

$

20,931

 

 

$

 

 

 

 

 

 

 

 

Fair Value Measurements at End of Period Using:

 

 

 

Total

 

 

Quoted Market

Prices for

Identical Assets

(Level 1)

 

 

Significant

Other

Observable

Inputs

(Level 2)

 

 

Significant

Unobservable

Inputs

(Level 3)

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

$

240

 

 

$

 

 

$

240

 

 

$

 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

$

22,777

 

 

$

 

 

$

22,777

 

 

$

 

U.S. Treasury securities

 

 

2,958

 

 

 

2,958

 

 

 

 

 

 

 

 

 

$

25,735

 

 

$

2,958

 

 

$

22,777

 

 

$

 

Preferred stock warrant liabilities

 

$

126

 

 

$

 

 

$

 

 

$

126

 

 

Marketable Securities. For fair values determined by Level 1 inputs, which utilize quoted prices in active markets for identical assets, the level of judgment required to estimate fair value is relatively low. The fair values of investments in U.S. treasury securities were determined using Level 1 inputs.

Fair values determined by Level 2 inputs, which utilize data points that are observable such as quoted prices, interest rates and yield curves, require the exercise of judgment and use of estimates, that if changed, could significantly affect the Company’s financial position and results of operations. Investments in certificates of deposit are valued using Level 2 inputs. Level 2 securities are initially valued at the transaction price and subsequently valued and reported utilizing inputs other than quoted prices that are observable either directly or indirectly, such as quotes from third-party pricing vendors.

There were no transfers in or out of Level 1 or Level 2 investments during the nine months ended September 30, 2017 or 2016.

At September 30, 2017 and December 31, 2016, the Company had investments in money market funds of $13.2 million and $2.2 million, respectively, that were measured at fair value using the net asset value per share (or its equivalent) that have not been classified in the fair value hierarchy. The funds invest primarily in U.S. government securities.

Warrant Liabilities. The Company’s preferred stock warrants were accounted for as liabilities and measured at fair value on a recurring basis as they were convertible into preferred stock, contingently redeemable under conditions that are not in the control of the Company. The Company estimated fair values of these warrant liabilities utilizing the Black-Scholes option pricing model, which requires Level 3 inputs.

11


 

Estimating fair values of derivative financial instruments, including Level 3 instruments, requires the use of significant and subjective inputs that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors, including changes in the estimated fair value of the Company’s equity securities.

The following table summarizes the activity in liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3 inputs) (in thousands):

 

 

 

Preferred

Stock Warrant

Liabilities

 

Balance at December 31, 2016

 

$

126

 

Gain on warrant valuation included in other income (expense), net

 

 

(37

)

Conversion of preferred stock warrants to warrants to purchase shares of common stock

 

 

(89

)

Balance at September 30, 2017

 

$

 

 

Fair Values of Other Financial Instruments

The carrying amounts of certain of the Company’s financial instruments, including cash and accounts payable, approximate their respective fair values due to their short-term nature. The carrying amount of the Company’s notes payable of $12.5 million at September 30, 2017 approximated their fair value as the terms of the notes are consistent with the market terms of transactions with similar profiles of one of the lenders as of those dates (Level 3 inputs).

4.

Certain Financial Statement Caption Information

Marketable Securities

The following is a summary of the Company’s marketable securities (in thousands):

 

 

 

Maturity

(in years)

 

Amortized Cost

 

 

Unrealized Gain

 

 

Unrealized Loss

 

 

Fair Value

 

September 30, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

1 or less

 

$

20,934

 

 

 

 

 

$

(3

)

 

$

20,931

 

U.S. Treasury securities

 

1 or less

 

 

3,800

 

 

 

 

 

 

 

 

 

3,800

 

 

 

 

 

$

24,734

 

 

$

 

 

$

(3

)

 

$

24,731

 

December 31, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

1 or less

 

$

19,299

 

 

$

1

 

 

$

(2

)

 

$

19,298

 

Certificates of deposit

 

>1 and <5

 

 

3,478

 

 

 

1

 

 

 

 

 

 

3,479

 

U.S. Treasury securities

 

1 or less

 

 

1,678

 

 

 

 

 

 

 

 

 

1,678

 

U.S. Treasury securities

 

>1 and <5

 

 

1,280

 

 

 

4

 

 

 

(4

)

 

 

1,280

 

 

 

 

 

$

25,735

 

 

$

6

 

 

$

(6

)

 

$

25,735

 

 

The Company has classified all of its available-for-sale investment securities, including those with maturity greater than one year, as current assets on the balance sheet based on the highly liquid nature of these investment securities and because these investment securities are considered available for use in current operations.

There were no impairments considered other-than-temporary during the periods presented, as it is management’s intention and ability to hold the securities until a recovery of the cost basis or recovery of fair value. Gross realized gains and losses on sales of marketable securities were immaterial for all periods presented.

12


 

Accrued Liabilities

Accrued liabilities are comprised of (in thousands):

 

 

 

September 30,

2017

 

 

December 31,

2016

 

Clinical trial expenses

 

$

2,826

 

 

$

2,196

 

Contract manufacturing services

 

 

1,779

 

 

 

1,508

 

Payroll and other employee-related expenses

 

 

2,340

 

 

 

728

 

Professional fees

 

 

391

 

 

 

459

 

Contract research services

 

 

53

 

 

 

114

 

Interest payable

 

 

87

 

 

 

120

 

Other

 

 

844

 

 

 

312

 

Total accrued liabilities

 

$

8,320

 

 

$

5,437

 

 

5.

Notes Payable

Loan Agreement

On October 30, 2015, the Company entered into a Loan and Security Agreement (the Loan Agreement) with two lenders whereby it borrowed $18.0 million (the Loans) on October 30, 2015. Balances under the Loan Agreement bear a floating rate of interest equal to the greater of 7.75% or the monthly prime rate plus 4.50% (8.75% and 8.00% at September 30, 2017 and December 31, 2016, respectively), and are due in monthly principal and interest payments, with final maturity of the Loans in May 2019. Each Loan bears a final payment fee of 7.95% of the original principal amount due upon maturity.

The costs incurred to issue the Loans of $0.6 million were deferred and are included in the discount to the carrying value of the Loans in the accompanying balance sheets. The Loans also include a final payment fee of $1.4 million due at the earlier of prepayment or the maturity date of the Loans. The deferred costs and the final payment fee are amortized to interest expense over the expected term of the Loans using the effective interest method. The effective interest rates on the Loans at September 30, 2017 and December 31, 2016 are 11.94% and 11.19%, respectively.

The aggregate carrying amounts of the Loans are comprised of the following (in thousands):

 

 

 

September 30,

2017

 

 

December 31,

2016

 

Principal

 

$

12,000

 

 

$

17,400

 

Add: accreted liability for final payment fee

 

 

765

 

 

 

462

 

Less: unamortized discount

 

 

(289

)

 

 

(421

)

 

 

$

12,476

 

 

$

17,441

 

 

The Loans are secured by substantially all of the Company’s assets other than its intellectual property, except rights to payment from the sale, licensing or disposition of such intellectual property. The Company is also required to maintain its primary operating accounts at all times with one of the lenders. The Loan Agreement contains customary conditions of borrowing, events of default and covenants, including covenants that restrict the Company’s ability to dispose of assets, merge with or acquire other entities, incur indebtedness and make distributions to holders of its capital stock. Should an event of default occur, including the occurrence of a material adverse change, the Company could be liable for immediate repayment of all obligations under the Loan Agreement. At September 30, 2017, the Company was in compliance with the covenants contained in the Loan Agreement.

13


 

Future maturities of the Loans, including the final payment fee, as of September 30, 2017 are as follows (in thousands):

 

 

 

September 30,

2017

 

Remainder of 2017

 

$

1,800

 

Year ending December 31, 2018

 

 

7,200

 

Year ending December 31, 2019

 

 

4,431

 

 

 

 

13,431

 

Unaccreted balance for final payment fee on Loans

 

 

(666

)

Unamortized discounts

 

 

(289

)

 

 

 

12,476

 

Less current portion

 

 

(7,200

)

Noncurrent portion

 

$

5,276

 

 

Convertible Promissory Notes Payable and Subscription Liability

During the three months ended March 31, 2017 and December 31, 2016, the Company issued convertible promissory notes to investors in aggregate principal amount of $7.5 million and $3.4 million, respectively, for a total aggregate principal amount of $10.9 million (the Convertible Notes). Of the Convertible Notes issued during the three months ended March 31, 2017, $140,000 was subscribed for at December 31, 2016, $250,000 was issued to a member of the Company’s board of directors and $10,000 was issued to the Company’s chief executive officer. The Convertible Notes, which bore interest at 7% per annum, were unsecured and were subordinated to the Loans.

At December 31, 2016, the aggregate carrying amount of the Convertible Notes was $3.4 million, which is net of an unamortized discount of $34,000. At December 31, 2016, the Convertible Notes included $1.0 million issued to members of the Company’s board of directors and $25,000 issued to the Company’s chief executive officer. The effective interest rate on the Convertible Notes at December 31, 2016 was 7.54%.

Upon completion of the Company’s IPO, $11.1 million of aggregate principal and accrued interest underlying the Convertible Notes were automatically converted into an aggregate of 1,109,176 shares of the Company’s common stock at the IPO price of $10.00 per share.

6.

Stockholders’ Equity (Deficit)

In March 2017, the Company’s board of directors and stockholders approved a 1-for-6.9 reverse stock split of the Company’s outstanding common stock. The accompanying financial statements and notes to the financial statements give retroactive effect to the reverse stock split for all periods presented.

Upon completion of the Company’s IPO, all of the Company’s outstanding shares of convertible preferred stock were converted into an aggregate of 6,690,066 shares of the Company’s common stock.  As of September 30, 2017, the Company’s authorized capital stock consists of 200,000,000 shares of common stock, par value $0.001 per share, and 10,000,000 shares of preferred stock, par value $0.001 per share.

The Company had 19,809,449 and 2,202,517 shares of common stock outstanding as of September 30, 2017 and December 31, 2016, respectively.

14


 

Changes in the number of shares of the Company’s convertible preferred and common stock outstanding and total stockholders’ equity (deficit) during the nine months ended September 30, 2017 were as follows (in thousands, except share amounts):

 

 

 

Shares of

Convertible

Preferred

Stock

 

 

Shares of

Common

Stock

 

 

Total

Stockholders’ Equity

(Deficit)

 

Balance, December 31, 2016

 

 

46,163,605

 

 

 

2,202,517

 

 

$

(124,417

)

Stock-based compensation

 

 

 

 

 

 

 

 

3,076

 

Exercise of stock options

 

 

 

 

 

32,688

 

 

 

47

 

Fractional shares adjustment upon reverse stock split

 

 

 

 

 

2

 

 

 

 

Preferred stock converted into shares of common

   stock

 

 

(46,163,605

)

 

 

6,690,066

 

 

 

131,410

 

Initial public offering of common shares, net of

   issuance costs

 

 

 

 

 

9,775,000

 

 

 

86,948

 

Convertible promissory notes converted into shares of

   common stock, net of costs to issue

 

 

 

 

 

1,109,176

 

 

 

11,057

 

Preferred stock warrants converted into common stock

   warrants

 

 

 

 

 

 

 

 

89

 

Other comprehensive loss

 

 

 

 

 

 

 

 

(3

)

Net loss

 

 

 

 

 

 

 

 

(28,092

)

Balance, September 30, 2017

 

 

 

 

 

19,809,449

 

 

$

80,115

 

Common Stock Reserved for Future Issuance

Common stock reserved for future issuance at September 30, 2017 is as follows:

 

Issued and Outstanding:

 

 

 

 

Stock options

 

 

2,636,060

 

Warrants for common stock

 

 

10,660

 

Shares reserved for issuance under the ESPP

 

 

250,000

 

Shares reserved for future award grants

 

 

489,602

 

Total

 

 

3,386,322

 

 

7.

Equity Incentive Plans and Stock-Based Compensation

2017 Equity Incentive Plan

In March 2017, the Company’s board of directors and stockholders approved and adopted the Company’s 2017 Equity Incentive Plan (the 2017 Plan), which became effective on April 12, 2017. The 2017 Plan provides for the grant of incentive stock options (ISOs), nonstatutory stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards, performance based stock awards, other forms of equity compensation and performance cash awards. ISOs may be granted only to employees. All other awards may be granted to employees, including officers, and to non-employee directors and consultants of the Company and its affiliates.

Initially, 1,600,000 new shares of common stock were approved for issuance under the 2017 Plan and, on April 12, 2017, 75,517 shares of common stock reserved for issuance under the Company’s 2009 Equity Incentive Plan, as amended (the 2009 Plan), were added to the shares initially reserved under the 2017 Plan. No further grants will be made under the 2009 Plan and any shares subject to outstanding stock options under the 2009 Plan that would otherwise be returned to the 2009 Plan will instead be added to the shares reserved under the 2017 Plan. Additionally, the number of shares of common stock reserved for issuance under the 2017 Plan will automatically increase on January 1 of each calendar year, from January 1, 2018 through January 1, 2027, by 4% of the total number of shares of the Company’s capital stock outstanding on December 31 of the preceding calendar year, or a lesser number of shares determined by the Company’s board of directors.

As of September 30, 2017, awards for up to 3,125,662 shares of common stock are reserved under the 2009 Plan and the 2017 Plan, of which 2,636,060 shares are reserved for issuance upon exercise of granted and outstanding stock options and 489,602 shares are available for future grants.

15


 

All grants of common stock options under the 2017 Plan expire in 10 years. Grants with time-based vesting provisions are subject to a four-year vesting schedule with 25% vesting after the first year, and the balance vesting monthly over the remaining 36 months. Grants with performance-based vesting provisions vest upon the achievement of three separate development and regulatory milestones, with one-third of the options vesting upon the achievement of each milestone.

The following table summarizes stock option activity under the 2009 Plan and the 2017 Plan:

 

 

 

Shares

Subject to

Options

 

 

Weighted-

Average

Exercise

Price per

Share

 

 

Weighted-

Average

Remaining

Contractual

Term

(in years)

 

 

Aggregate

Intrinsic Value

(in thousands)

 

Outstanding at December 31, 2016

 

 

1,385,855

 

 

$

11.35

 

 

 

 

 

 

 

 

 

Granted

 

 

1,344,245

 

 

$

15.10

 

 

 

 

 

 

 

 

 

Exercised

 

 

(32,688

)

 

$

1.44

 

 

 

 

 

 

 

 

 

Forfeitures and cancellations

 

 

(61,352

)

 

$

14.47

 

 

 

 

 

 

 

 

 

Outstanding at September 30, 2017

 

 

2,636,060

 

 

$

13.31

 

 

 

8.4

 

 

$

4,306

 

Time-based options at September 30, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding

 

 

2,447,409

 

 

$

13.08

 

 

 

8.3

 

 

$

4,306

 

Vested and expected to vest

 

 

2,447,409

 

 

$

13.08

 

 

 

8.3

 

 

$

4,306

 

Exercisable

 

 

654,448

 

 

$

7.21

 

 

 

5.4

 

 

$

3,792

 

Performance-based options at September 30, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding

 

 

188,651

 

 

$

16.30

 

 

 

9.2

 

 

$

 

Vested and expected to vest

 

 

 

 

$

 

 

 

 

 

$

 

Exercisable

 

 

 

 

$

 

 

 

 

 

$

 

 

The total fair value of options vested during the nine months ended September 30, 2017 and 2016, was $1.2 million and $0.9 million, respectively.

The aggregate intrinsic value of options is calculated as the difference between the exercise price of the options and the fair value of the Company’s common stock for those options that had exercise prices lower than the fair value of the Company’s common stock. The aggregate intrinsic value of stock options exercised during the nine months ended September 30, 2017 and 2016 was $0.4 million and $62,000, respectively.

2017 Employee Stock Purchase Plan

In March 2017, the Company’s board of directors and stockholders approved and adopted the Company’s 2017 Employee Stock Purchase Plan (ESPP) whereby eligible employees may elect to withhold up to 15% of their earnings to purchase shares of the Company’s common stock at a price per share equal to the lower of (i) 85% of the fair market value of a share of the Company’s common stock on the first date of an offering or (ii) 85% of the fair market value of a share of the Company’s common stock on the date of purchase (purchase right). The ESPP became effective on April 12, 2017.  The ESPP authorizes the issuance of 250,000 shares of the Company’s common stock pursuant to purchase rights granted to the Company’s employees or to employees of any of the Company’s designated affiliates. The number of shares of common stock reserved for issuance will automatically increase on January 1 of each calendar year, from January 1, 2018 through January 1, 2027, by the lesser of (a) 1% of the total number of shares of the Company’s common stock outstanding on December 31 of the preceding calendar year, (b) 300,000 shares, or (c) a number determined by the Company’s board of directors that is less than (a) and (b).

16


 

Stock-Based Compensatio